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Oil Majors Pivoting Away from Risky Countries

The rising tide of political instability around the world is negatively affecting the some of the oil industry’s largest companies, and several are considering withdrawing their investments in risky areas.

Violence, government turmoil, sabotage, and economic sanctions are presenting serious challenges to the oil majors, after years of expanding deeper and deeper into some of the least developed parts of the world.

The Wall Street Journal wrote on July 27 about several companies that are pivoting away from troubled regions, and moving towards industrialized countries -- willing to assume the higher cost of operating in richer nations as the price for a more stable investment climate.

ExxonMobil is no stranger to these problems. It inaugurated its $19 billion Papua New Guinea liquefied natural gas facility earlier this year, which is now running at full capacity and delivering LNG to clients in Asia. However, costs reached 25 percent higher than originally projected, owing to “poor infrastructure, rough terrain, and angry locals,” as the Wall Street Journal put it.

ExxonMobil’s problems in Russia could far outweigh its difficulties in Papua New Guinea. The company is working with Rosneft, Russia’s state-owned oil company, and has billions of dollars tied up in multiple oil and gas projects in Siberia, the Arctic, and the Russian Far East.

ExxonMobil has vowed to maintain its ties to Rosneft and move forward despite the fact tat the U.S. and Europe are tightening the financial screws on Moscow. But after the latest round of sanctions were announced on July 29, Rosneft’s chairman of the board, Alexander Nekipelov, said that ExxonMobil could face increasing pressure to pullback from Russia. “Exxon relations with Rosneft are a deep cooperation designed for decades,” he said. “However, if the U.S. adopts legal measures, Exxon might be forced to stop or suspend cooperation or sharply restrict it.”

BP is also concerned. It owns a 20 percent stake in Rosneft, and although the British oil giant has seen its profits rise from its Russian investments, it sent a warning to investors about its exposure to the standoff between Russia and the West. Expanded sanctions “could have a material adverse impact on our relationship with and investment in Rosneft, our business and strategic objectives in Russia and our financial position and results of operations,” BP said in its quarterly earnings report.

The conquering advances across Iraq by the Islamic State of Iraq and the Levant has also raised questions about the security of oil production there. ExxonMobil and BP had to evacuate workers from the West Qurna field in late June due to worries about violence.

The Italian oil company Eni is reeling from the flurry of investments in Africa that have been hit by violence. As the largest foreign producer of oil on the continent, it has seen several high profile projects affected by instability. On July 30, the company’s pipeline in Nigeria was damaged in an explosion that cut off the flow of 20,000 barrels per day.

Eni also has a large presence in Libya, where ongoing violence has all but shut oil down production. Although a political deal in early July appeared to be a first step toward stability, the country has once again been rocked by violence, this time in Tripoli. The U.S., France, Germany, Canada, and others pulled out their embassy staff due to the violence. Italy is staying put for now, likely because of Eni’s financial stake in the country.

The turmoil facing Eni’s African portfolio has hurt its earnings. The company earns $15 per barrel of oil its produces from sub-Saharan Africa, compared to $18 per barrel it receives from its North American projects. That has Eni’s chief considering diversification away from its African investments.

As a group, many of the oil majors have shifted their spending to countries that are members of the Organization for Economic Cooperation and Development (OECD). Royal Dutch Shell now spends 67 percent of its exploration budget in OECD countries, up from 57 percent in 2007. ExxonMobil’s spending in OECD countries rose from 51 percent in 2003 to 67 percent in 2013. Chevron’s OECD expenditures grew from 39 percent in 2003 to 66 percent in 2013.

The problem, of course, is that much of the world’s remaining oil and gas reserves are not located in friendly environments. That means that the oil majors will have to balance future production growth versus the risk of operating in dangerous areas of the world.

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